Financial market integration: Theory and empirical results

In this article, we introduce a new theoretical international asset pricing model which accounts for partial financial market segmentation. We show that if some investors do not hold all international assets because of implicit and/or explicit segmentation factors, the world market portfolio is not efficient and the classic ICAPM must be augmented by a new factor reflecting the local risk undiversifiable internationally. We test this model empirically for a sample of emerging markets. Our findings show that the degree of market integration is time-varying and that the premium associated with the domestic risk factors is the most important component of the total risk premium. However, our results also show that most of the emerging markets we study have become more integrated in the end of our sample period as a result of liberalization and reforms.     

Expectation errors and exchange-rate volatility

Exchange-rate volatility may be attributable to shifting market expectations, even in the absence of exogenous or policy induced shocks. The response of optimizing monetary policy to transitory deviations from rational expectations is examined. The effects of such deviations are shown to be enduring, their magnitude depending inter alia on the relative weight given by the authorities to output growth and price stability, and to differ qualitatively from overshooting of the Dornbusch type.     

On investment and exchange-rate movements

We investigate the ways in which permanent exchange-rate changes may affect investment by influencing domestic and foreign revenue, the cost of imported variable inputs and the investment price of imported capital goods. We find that the revenue and investment-price channels have a quantitatively greater effect on investment than the cost channel. The negative effect of the revenue channel, which affects the marginal profitability of capital, outweighs the positive effect of the investment-price channel, which affects the marginal cost of capital, implying that exchange-rate appreciation has a net negative influence on investment. The estimation results are robust to different approaches to extracting the permanent components of exchange rates.     

The model and empirical estimation of the optimal flexibility of RMB exchange-rate regime: A study based on the price-stabilization

Under the Mundell-Fleming-Dornbusch (M-F-D) framework, the paper develops a stochastic model to study the optimal choice of RMB exchange rate regime based on two objectives, namely the exchange rate stabilization and price stabilization. The paper finds that different policy objectives will lead to different optimal choices of RMB exchange-rate regime. If the central bank aims to stabilize the price level, the optimal choice would be a certain type of intermediate regime, or the optimal choice would be a fixed one if it aims to stabilize the RMB exchange rate. Based on the model, the paper empirically estimates China’s open economy parameters and uses them to estimate the optimal flexibility of RMB exchange rate regime. The paper points out that China should allow more exchange rate changes to absorb its foreign exchange market pressure in order to stabilize the general price level, which indicates that China should move toward a more flexible exchange rate regime.     

Some empirical results on “the rationality” of expectations derived from survey data

The purpose in this paper is to examine the properties of time series of expectations data derived from survey data, when explicit allowance is made for the time horizon of the forecasts and the information set which agents possess. Our empirical results suggest that three of the five series examined exhibit ex-post bias.     

Kalman filtering as an alternative to Ordinary Least Squares — Some theoretical considerations and empirical results

The purpose of this paper is to highlight the superiority of the Kalman filter over Ordinary Least Squares for estimating the unknown coefficients of the classical linear regression model. Both methods are analyzed with respect to their optimality properties and their usefulness in dealing with multicollinearity. Theoretical results are applied to two economic models.     

ReGale: Some memorable results

This article reviews, with admiration and awe, the scientific contributions of David Gale.     

Family labour supply: some empirical results from agriculture

The family is often taken as the decision-making unit in utility maximizing theories of labour supply. At a simple level, the family is composed of two elements, dependents and workers. This paper seeks to quantify the influence of these two elements on family labour supply in agriculture. Family farms are particularly suited to such analysis since institutional rigidities, like the fixed working week, are absent. Econometric methods are used on data from farms in the north-west of england for the year 1976/7. The cross-sectional study uses single equation methods. The results show that only family composition determines the labour supply of the farm family: they can then be used to quantify the effects of individual groups of dependents and workers on family labour supply.     

Distribution and growth reconsidered: empirical results for six OECD countries

We analyse the relationship between functional income distributionand economic growth in Austria, France, Germany, the Netherlands,the UK and the USA from 1960 until 2005. The analysis is basedon a demand-driven distribution and growth model for an openeconomy inspired by Bhaduri and Marglin, which allows for eitherprofit- or wage-led growth. We find that growth in France, Germany,the UK and the USA has been wage-led, whereas Austria and theNetherlands have been profit-led. In the case of Austria a domesticallywage-led economy changes to profit-led when including the effectof distribution on external trade. The Netherlands, however,are already profit-led without external trade. Our results sofar only partially confirm Bhaduri and Marglin's theoreticalconclusion that wage-led growth becomes less feasible when theeffects of distribution on foreign trade are taken into account.     

Military expenditure and the rate of profit: some empirical results

This article begins with a discussion of the seminal work of Luxemburg and the related work of Mandel. Using OLS estimation methods it proceeds to test for the relationship between military expenditure, the rate of profit and other related variables in advanced industrialized countries. Using annual time-series data the estimates, together with several diagnostic tests, are undertaken for the period 1958–87 for the UK, the USA and former W. Germany.     

Supply and demand factors of Cleaner technologies: Some empirical evidence

This article identifies and analyzes factors that affect the willingness of firms and consumers to develop and adopt cleaner technologies. Cleaner technologies is used as a general term for pollution abatement technologies, re-use systems, and environmentally sound consumer products and materials. The article also contains the findings of three case studies on cleaner technologies (CFC substitutes, low-solvent paints and coatings, and membrane technology), in which the importance of the identified factors is investigated. From the case studies some general conclusions are drawn about these factors, and the way in which policy instruments can be used to stimulate innovation in and diffusion of cleaner technologies. No single policy instrument is considered to be optimal. Instead a policy mix is needed, involving a much wider use of economic instruments.This paper is based on a research project for the Ministries of Economic Affairs and the Environment in the Netherlands, and is a revision of an earlier paper Policy Instruments to Stimulate Cleaner Technologies, which was prepared for the EAERE conference in Stockholm, June 11–14th, 1991. The authors thank the referee for helpful comments.     

Growth and export expansion in developing countries: Some empirical evidence

This paper analyzes the empirical relationship between economic growth and export expansion in developing countries as observed through an intercountry cross-section. Employing data from 55 middle income developing countries for the period 1960–1977, bivariate tests revealed significant positive associations between growth and various other economic variables including the growth of manufacturing output, investment, total exports, and manufacturing exports. A production function model was also specified and estimated with the cross-sectional data. The results indicated that export performance was important, along with capital formation, in explaining the intercountry variance in GDP growth rates during the 1960–1977 period.     

Some political determinants of economic growth: Theory and empirical implications

This work studies the effects of the political environs on economic growth. The theoretical result from a mathematical model suggests that regime instability, political polarization, and government repression all have a negative impact on economic growth. A cross-sectional analysis of 88 countries over the period of 1974–1990 provides preliminary confirmation of three implications derived from the theoretical model.     

Volatility spill-overs in commodity spot prices: New empirical results

The classical rational expectations model of commodity markets implies that expected spot price risk is an explanatory variable in spot price regressions; and also that inventory carryover, which is reduced by a larger price variance, creates autoregressive conditional heteroscedastic processes in spot prices. In order to falsify/verify this theory, it has typically been assumed that the square root of the conditional variance of spot prices, a proxy for spot price risk, enters the conditional mean function of spot prices. Based on this simple representation, a typical but counter intuitive outcome has been that spot price risk has an insignificant impact on spot prices, see, e.g., Beck (Beck, S., 1993. A Rational Expectations Model of Time Varying Risk Premia in Commodities Futures Markets: Theory and Evidence. International Economic Review 34, 149–168, Beck, S., 2001. Autoregressive Conditional Heteroskedasticity in Commodity Spot Prices. Journal of Applied Econometrics 16, 115–132). In this paper, we propose an alternative functional relationship (from GARCH(1,1) to GARCH(1,1)-AR(m)) between spot price risk and spot prices that is fully supported by the classical rational expectations model, and based on this new representation we are able to provide stronger empirical support for Muth's rational expectation theory.     

Linearized Hamiltonian of the LIBOR market model: analytical and empirical results

The linearized Hamiltonian model is proposed to extend the London Interbank Offered Rate (LIBOR) Market Model (LMM). Firstly, we studied the Hamiltonian of LMM in the framework of quantum finance, and the nontrivial upper triangle form of LIBOR drift is derived. The linearized Hamiltonian is derived to improve the explanatory capability of the model for market data. Our approach uses one more parameter to explain the initial condition and the model can be used to calibrate LIBORs with extremely high accuracy. Furthermore, the market time index is required for applying the model to multi-LIBOR, and the results imply that the LIBOR future time lattice becomes shorter as one goes from near future to distant future.     

Involuntary saving through unanticipated inflation: Some further empirical evidence

In a recent paper Deaton formulated a novel disequilibrium theory of saving behaviour. The essence of his hypothesis is that individual consumers have no possible means of distinguishing relative from absolute price changes. This hypothesises subject to further empirical testing in our note. Using data for Canada, Japan, the United Kingdom and the United States we re-examine the hypothesis assuming either static, adaptive, extrapolative or rational price and output expectations.     

Market power of firms and exchange-rate fluctuations

This paper explores the potential of firms to restrict industry outputs (market power) in oligopolistically organized markets where domestic firms compete with foreign ones. Within a stochastic price-setting supergame framework, market power is shown to be lower in general with flexible exchange rates for the following reasons. (i) The conditions that the fully collusive outcome—oligopolists maximizing joint profits — is sustainable in equilibrium become stronger if the exchange rate fluctuates, provided that fluctuations are sufficiently small. (ii) Even if full collusion can be sustained, industry outputs will be higher on the average with flexible than with fixed exchange rates.     

Deficit spending,money, and inflation: Some international empirical evidence

An attempt is made, in this study, to examine the monetarist propositions regarding the effects of budget deficits on money growth and inflation for ten industrialized countries. To this end, a two-equation econometric model consisting of the money supply growth and inflation equations has been specified and estimated. Based on the results, it is concluded that, in general, the government budget deficit is not a determinant of money supply growth or of inflation (directly or indirectly). The U.S. is an exception with some statistical evidence of direct and indirect effects of the budget deficit on inflation.